The “Trump Rally” continued last week, leaving the small-cap Russell 2000 index — as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) up another 2.8% to a roughly 18% return year-to-date.
What a sea change the past two weeks has seen for the stock market!
However, while price action for the IWM ETF has been resoundingly positive over the past few weeks, in the near-term, it looks increasingly overbought. Let’s look at the forecast for IWM through the rest of 2016.
When I last mused about the Russell 2000 on Oct. 25, I pointed to the relative and absolute weakness it had shown versus the PDR S&P 500 ETF Trust (NYSEARCA:SPY). Specifically, I said that if the IWM ETF were to break below the $120 mark, it likely would tumble toward its 200-day simple moving average, where next possible better support could be found. By Nov. 3, the IWM ETF had just about satisfied this corrective move. On Nov. 7, it was off to the races (to the upside) again.
IWM ETF Charts
As part of my daily and weekly research process, I look at markets through both an absolute and a relative lens. Looking at the relative picture of the IWM ETF versus the SPY ETF since the Trump rally has gotten underway, we see how the Russell 2000 has dramatically outperformed.
All else being equal, seeing small-cap stocks outperform their larger cousins is a bullish sign. I wouldn’t look to fight this; certainly not over the next few weeks.
On the ratio chart below, note the big, bold breakout move past diagonal resistance.
On the multiyear weekly chart, you can see that the IWM last week blasted to fresh all-time highs as it took out its previews highs from September. Note also that all along at the January/February lows this year, the index also held its multiyear uptrend line.
This, combined with the fresh all-time highs from last week as well as the relative breakout from the past two weeks, is something to respect. I would assume a “buy the dip” posture here, based on this.
On the daily chart, we see that the nearly 14% rally since early November has brought the IWM back to the upper end of its 2016 uptrending channel. From a momentum perspective, the MACD oscillator at the bottom of the chart is now at all-time “overbought” readings.
Despite the multi-week bullish tone from the daily chart, that chart does seem to be pointing toward consolidation.
Note also that the IWM ETF now trades well above its 8- and 21-day simple moving averages (blue and yellow lines, respectively), which historically speaking tends to lead to a consolidation phase.
Bottom Line
Instead of chasing the IWM ETF higher right here right now, the higher-probability trade is to let it consolidate so that at the very least the 8-day moving average can catch up with price and we get some sort of sideways to slightly lower price action. From there, buy any bullish reversals or breakouts.
The IWM, barring any major bearish reversals, has a good chance of stretching into the $135-$140 area into year’s end.
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